Ambac Warns of Default as Bondholders Organize

Wednesday, 09 Jun 2010 03:24 PM

 

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Ambac Financial Group, the bond insurer whose toxic assets were seized by Wisconsin state regulators in March, said it could default on its loan obligations and was still considering filing a prepackaged bankruptcy.

The company, which has had trouble writing new business since losing its 'AAA' credit rating in 2008, said in a U.S. Securities and Exchange Commission filing on Tuesday that "as early as the second quarter of 2010" it may decide not to make interest payments on its debt, which could result in a default.

Holders of some of Ambac Financial Group's $1.24 billion senior debt, have formed an ad hoc committee and will try to push the company into a prepackaged bankruptcy, people familiar with the matter told Reuters.

Ambac shares fell as much as 16 percent in extended trading following the news.

The bondholders' committee, which includes hedge funds Centerbridge Partners, Halcyon Capital Management, Mangrove Partners and Camden Asset Management, is looking to use a prepackaged bankruptcy to exchange their debt for equity in the company, the sources said.

The sources declined to be named because the details are not public.

Such a swap could give the bondholders significant stock ownership of a reorganized Ambac and likely wipe out current equity, these people said.

Ambac said in the regulatory filing that it could consider raising additional capital, restructuring through a "prepackaged bankruptcy" or filing a traditional bankruptcy without agreements from creditors.

"While management believes that the Company will have sufficient liquidity to satisfy its needs through the second quarter of 2011, no guarantee can be given that it will be able to pay all of its operating expenses and debt service obligations thereafter, and its liquidity may run out prior to the second quarter of 2011," Ambac said in the filing.

The ad hoc bondholder committee has hired Morrison & Foerster as legal counsel and investment bank Lazard as financial adviser, the sources said.

Wisconsin state regulators took over roughly $64 billion of Ambac's worst assets in March.

The insurer, along with rivals like MBIA , has been battling crippling losses from risky mortgage securities amid the financial crisis.

Up until now Ambac's negotiations with counterparties, have largely helped it deal with liabilities of its principal operating unit, Ambac Assurance Corp. But the company has not yet formally addressed debt issues at its holding company, Ambac Financial.

Ambac said late on Monday that it has commuted its remaining $16.4 billion of exposure to collateralized debt obligations of asset-backed securities at its operating company.

The company will pay $2.6 billion in cash and issue $2 billion of surplus notes, as part of an agreement with counterparties, it said.

The holding company could use the bankruptcy process to resolve its debt issues, without putting the operating company into bankruptcy and without necessarily affecting any agreements made by the operating company.

Ambac said in the regulatory filing on Tuesday, that it was unlikely Ambac Assurance would be able to make dividend payments "for the foreseeable future" and that the company's liquidity and solvency are "largely dependent" on such dividend payments.

A possible default or missed interest payment is often a touch-off point for companies to begin serious negotiations with bondholders and other creditors.

In order to do a prepackaged bankruptcy, the company would have to successfully negotiate agreements with a majority of its creditors, including bondholders. Prepackaged bankruptcies have become more popular in the past few years as a quicker route through the bankruptcy process.

Ambac shares closed up 3.9 percent at $1.07 on the New York Stock Exchange on Tuesday, but dropped as much as 16 percent to 90 cents in after-hours electronic trading.

© 2014 Thomson/Reuters. All rights reserved.

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